Starbucks' China Stake Sale: A Necessary Reset or a Risky Gamble?

The once-dominant Starbucks in China has seen its market share plummet from 34% in 2019 to just 14% in 2024, according to Euromonitor International. This dramatic decline, fueled by aggressive competition from local rivals like Luckin Coffee and Cotti, has pushed Starbucks to explore selling a minority stake in its China business—a move that could fetch between $5 billion and $10 billion. While the stake sale aims to secure local expertise and revive growth, investors must scrutinize whether the valuation is realistic, the execution feasible, and whether the proceeds can meaningfully accelerate Starbucks' U.S. turnaround.

Valuation Risks: Is $10B+ Overbidding a Declining Asset?

The $10 billion valuation hinges on Starbucks' ability to recover its market position in China—a goal that looks increasingly uphill. Competitors like Luckin, now operating 24,000 stores compared to Starbucks' 7,500, have mastered affordability (prices as low as $0.70 per cup) and digital integration, while Starbucks' premium pricing and slower adaptation have left it vulnerable.

The data shows China revenue fell 2% in fiscal 2024 to $3 billion, with same-store sales flat in early 2025 after four straight quarters of declines. Even price cuts on non-coffee drinks—a tactical shift—have yet to reverse the trend. WithLuckin and Cotti capitalizing on price-sensitive consumers and e-commerce subsidies, Starbucks' China unit risks becoming a low-margin, commoditized business. A $10B valuation assumes operational turnaround and margin stabilization, but execution risks loom large.

Execution Challenges: Balancing Local Control and Global Brand

Starbucks aims to retain a “meaningful stake” (likely 30%) while partnering with buyers like KKR or Hillhouse Capital. This raises critical questions:
- Can foreign or local investors align their priorities with Starbucks' brand identity?
- Will operational control over pricing, store locations, and digital strategies dilute the global brand?

High rents in prime locations (a key cost driver) and reliance on mall concessions—now less foot-traffic-heavy—add structural hurdles. Even if the sale proceeds, operational agility in China remains uncertain, especially as competitors continue to outmaneuver Starbucks in tech-driven loyalty programs and delivery partnerships.

U.S. Turnaround: Can Proceeds Revive Domestic Growth?

The proceeds from the stake sale could unlock value elsewhere. Starbucks' U.S. business faces its own challenges, including declining foot traffic and rising labor costs. A potential use of funds:
- Accelerate refranchising: Reducing company-operated stores could cut costs and boost margins.
- Fuel the Green Apron initiative: This store redesign program aims to improve customer experience and profitability.
- Shareholder returns: Buybacks or dividends could lift the stock, especially if U.S. same-store sales rebound.

However, the U.S. turnaround is not guaranteed. Competitors like Dunkin' and Tim Hortons are also innovating, and economic pressures could further strain discretionary spending.

Geopolitical Risks: Navigating a Fractured Global Landscape

The stake sale also introduces geopolitical risks. A Chinese partner could ease operational friction but might complicate compliance with U.S. regulations or expose the brand to trade tensions. Additionally, retaining a 30% stake means Starbucks remains exposed to China's economic volatility and regulatory shifts—such as sudden restrictions on foreign-owned brands.

Investment Implications: Target $135 or Prepare for a Reset?

Starbucks stock trades at around $90, with Bernstein's $135 price target implying 50% upside. To reach that, the China stake sale must:
1. Validate the $10B valuation by demonstrating a credible path to market share recovery.
2. Execute the partnership without brand dilution or operational chaos.
3. Reinvigorate U.S. profitability through refranchising and store optimization.

Failure here could lead to a valuation reset, especially if China's contribution to earnings remains weak. Investors should demand clarity on stake-sale terms, post-sale China performance metrics, and U.S. cash flow improvements.

Conclusion: A High-Stakes Gamble with Two Outcomes

The China stake sale is a necessary move to address a fading market position, but its success is far from assured. While the $10B valuation may be achievable in the short term due to investor optimism, long-term value hinges on operational execution and strategic repurposing of proceeds. For Starbucks to hit Bernstein's $135 target, it must prove it can navigate both China's cutthroat competition and the U.S.'s stagnating coffee market. Until then, investors should proceed with caution—this is a bet on execution, not just valuation.